Pottery Children, Inc. specializes in gourmet pottery products for young people and receives all income from sales. Last year, ending payables, receivables, inventory and cash balance were exactly equal to the firms average historical levels of $200M, $400M, $300M and $500M, respectively. The firm also sold $5B in revenue over the course of last year. On average, the firms gross profit margin is 40%, which means that the cost of goods sold (inventory purchases) is 60% of revenue, though they are purchased a quarter in advance. The firm likes to maintain a minimum balance of $400M. Other relevant expenses include the following: Wages, taxes, and other expense are 40% of sales, which are projected to be one fourth of last years total for the first quarter. Each quarter after that, sales are expected to grow by 1%. Interest and dividend payments are $50M, and a major capital expenditure of $250M is expected in the second quarter. Assume the year includes 4 quarters with 90 days each.

a. Compute the inventory and receivables periods. What is the firms operating and cash cycle?

b. What are cash collections and ending receivables for quarters one through four?

c. What are cash payments and total disbursements for quarters two, three and four?

d. What is the net cash flow and cumulative surplus or deficit for quarters two and three?

e. What does this imply about firm cash needs? What would the firm do about the surplus or deficit?